Finance-growth nexus in sub-Saharan Africa

Abstract

Background: There is now significant empirical literature suggesting that finance is good for growth only up to a threshold level of financial development, becoming harmful after that level, in developed and developing countries.Aim: This study extends this literature that investigates non-linearities on the finance-growth link, by testing the inverted U-shape hypothesis in sub-Saharan African countries, which are among the least developed ones.Setting: 36 countries from sub-Saharan Africa over the period 1980–2015.Method: Estimation of quadratic dynamic panel data models by system-generalised method of moments.Results: Empirical results show that there is a hump-shaped relationship between financial development and economic growth in sub-Saharan African countries.Conclusion: Results suggest that the hypothesis of ‘too much finance harms economic growth’ also holds for low-income and less developed countries, but for much lower threshold levels of financial development than those of more developed and higher-income countries. As for policy implications, measures to strengthen finance quality and other growth-enhancing strategies need to be undertaken, rather than increasing finance size.

Growth, Unemployment and Inflation in Sub-Saharan Africa: The role of Financial Development and legal systems and Property Rights

“…Financial development essentially reduces information, transaction, and monitoring costs while optimizing the distribution of money and risk throughout the economy. This leads to greater investment and higher-quality investment, which in turn promotes economic growth (Machado et al, 2021). Abbas et al (2022), in a study comparing lower middle-income countries and upper middleincome countries, find that economic growth and income distribution are affected by the level of financial inclusion.…”